The IRS released their formal guidance yesterday on tax deductions from expenses paid for with Paycheck Protection Program finds. In April 2020, the IRS made their position known; they would not allow any deductions for expenses paid with forgiven PPP funds. During the year I’ve written about, and been on the radio to talk about, how the IRS is wrong about this. In December, the IRS issued another statement where they dug in their heels, saying that the expenses are not deductible and if you expect to have the loan forgiven in 2021 then you shouldn’t include the deduction on your 2020 tax returns. I, and many other tax practitioners, and professional organizations like the American Bar Association and AICPA all disagreed with this for several reasons. With the new stimulus provisions that were recently signed into law, Congress made their intent so clear that even the IRS could understand it.
The IRS, in Revenue Ruling 2021-02, states “no deduction is denied, no tax attribute is reduced, and no basis increase is denied by reason of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan.” This announcement brings good news to business owners but is also leaving many people with questions about what expenses are considered eligible. Simply put, if you are trying to determine if an expense is deductible, you can remove the fact that you paid for it with PPP funds from the equation. To put a cherry on top, the amount of your PPP loan that can be forgiven is no longer reduced by an EIDL advance that you may have gotten and that advance is no longer taxable.
Feel free to post any general questions below, but you should have a conversation with your tax professional if you have questions about your specific situation. If you’re looking for a new tax professional either for tax preparation or resolving a problem you’re having with the IRS, contact us today for a free initial consultation.
Joseph Orabona III, EA
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Windsor Locks, CT 06096